LawFlash

On June 24, 2010, the United States Supreme Court published decisions in three cases challenging the federal “honest services” fraud statute, 18 U.S.C. § 1346, which makes it a federal crime to engage in “a scheme or artifice to deprive another of the intangible right of honest services” and which has been widely used to prosecute conduct in both the public and private sectors. In a ruling that shows the continuing struggle between prosecutors and the Court over the scope of broadly worded criminal statutes, the Court confined § 1346 to include only schemes involving bribery and kickbacks.

For years, courts interpreted the federal mail and wire-fraud statutes’ broad prohibition of “any scheme or artifice to defraud” to encompass the deprivation of intangible rights, including the right to so-called “honest services.” In McNally v. United States, 483 U.S. 350 (1987), however, the Supreme Court invalidated this doctrine, limiting the reach of the statutes to the protection of property rights and directing Congress to “speak more clearly” if it wished to protect so-called intangible rights. Congress responded the following year by enacting 18 U.S.C. § 1346.

Since the enactment of the honest services statute, the government has used it to prosecute an expansive range of behavior, on which courts have imposed varying requirements. For example, some courts have required the government to prove only that a defendant violated a fiduciary duty established by state or federal law, while other courts have required the government to prove an independent state law violation as a predicate for the honest services fraud.

As a result of the inconsistent application of the honest services doctrine, the Supreme Court granted certiorari in three cases this term, Skilling v. United States, Black v. United States and United States v. Weyhrauch. Although each case presented a different challenge to § 1346, the Court’s ruling in Skilling, in which it limited § 1346 to schemes to defraud involving bribes and kickbacks, essentially disposed of the honest services questions presented in Black and Weyhrauch.

Skilling: Section 1346 Encompasses Only Bribery and Kickback Schemes

A federal jury in Houston, Texas, convicted former Enron Corporation chief executive Jeffrey K. Skilling on multiple counts of securities fraud, insider trading, making false representations to auditors, and conspiracy to commit securities fraud and wire fraud. One of the government’s theories in prosecuting the charge of conspiracy to commit wire fraud was that Skilling defrauded Enron and its shareholders of his honest services in violation of § 1346 when he engaged in an undisclosed plan to artificially inflate the stock’s price by misrepresenting the company’s true financial condition. Skilling countered that, at a minimum, § 1346 requires a finding that the defendant acted for private gain distinct from regular compensation. Because Skilling did not seek or receive gain in the form of bribes or kickbacks, he argued, his conduct did not involve the corrupt pursuit of private gain necessary under § 1346. The Fifth Circuit upheld Skilling’s conviction, but ordered a new sentencing due to a misapplication of the federal sentencing guidelines. Skilling’s appeal to the Supreme Court raised the issue of whether § 1346 requires that a defendant employee’s conduct be intended to achieve private gain above and beyond ordinary compensation and, if not, whether the statute is unconstitutionally vague.

In an opinion authored by Justice Ginsburg, the Court determined “that § 1346 criminalizes only the bribe-and-kickback core of the pre-McNally case law.” Skilling v. United States, No. 08-1394 at 35 (U.S. June 24, 2010) (slip op.) (emphasis in original). Because the government never alleged that Skilling solicited or accepted side payments from a third party in exchange for his misrepresentations about Enron, it “is therefore clear that, as [the Court reads] § 1346, Skilling did not commit honest-services fraud.” Id. at 49-50. The Court vacated Skilling’s conspiracy conviction and remanded the case to the Fifth Circuit to resolve the question of whether the inclusion of honest services fraud as one of three objects of the charged conspiracy was harmless error, and whether the potential reversal on the conspiracy count impacts Skilling’s other convictions.1Id. at 50.

As a result of its decision in Skilling, the Court vacated the honest services conviction in Black (and remanded for further consideration in light of Skilling) because the jury instruction in that case allowed conviction on the honest services charge based on conduct not limited to bribes and kickbacks. Black v. United States, No. 08-876 (U.S. June 24, 2010) (slip op.). Similarly, in Weyhrauch, an honest services case involving a public employee, the Court remanded for further consideration of the honest services charge presented there, also in light of Skilling. United States v. Weyhrauch, No. 08-1196 (U.S. June 24, 2010) (slip op.). The remand in Weyhrauch makes it clear that the Court’s limitation on § 1346 applies to both public and private actors.

Significance of the Court’s Limitation of § 1346

The Court’s decisions in Skilling, Black and Weyhrauch do not necessarily mean that any of these particular defendants will face lesser charges or shorter sentences on remand. It is conceivable that the lower courts may deem harmless the errors identified in Skilling and Black, and may determine that the honest services charge in Weyhrauch falls within Skilling and may proceed.

Nonetheless, the Court’s limitation of the honest services theory to conduct involving bribes and kickbacks is significant. The Court’s decision in Skilling potentially impacts hundreds of other honest services convictions, and will no doubt have an effect on pending prosecutions and future charging decisions. It marks another chapter in what has been a long battle between federal prosecutors and the courts over the criminalization of conduct based on broadly worded federal statutes. The limitations imposed on federal prosecutors as a result of Skilling will lead to increased reliance on other, similarly broadly worded statutes in an effort to punish what prosecutors view as wrongful conduct. While the Court in Skilling (and numerous cases before it) held that criminal statutes must clearly define the conduct they proscribe, prosecutors historically have tried, and undoubtedly will continue to try, to cast as broad a net as possible. This likely means continued reliance on the mail and wire fraud statutes, together with the development of new legal theories to support such charges, and a push for Congress to clearly define and codify the “bad behavior” previously charged as honest services fraud.